As the end of the year approaches, Nebraska Farm Bureau is encouraging farmers and ranchers to consider how they could benefit from changes to the federal tax code.
In December 2017, Congress passed and President Donald Trump signed changes to the federal tax code through the Tax Cuts and Jobs Act. According to Nebraska Farm Bureau, those changes could yield significant benefits to farm and ranch families.
Nebraska Farm Bureau has developed a guide, "5 Things to Remember: Federal Tax Code Changes for Farmers and Ranchers," to help farmers and ranchers navigate those changes, and aid them in end-of-the-year tax planning.
Jordan Dux, Nebraska Farm Bureau director of national affairs, encourages farmers and ranchers to use the guide, but says it's always best to consult a tax professional to examine any changes that could impact their farm or ranch.
5 things to remember
Here are the five suggestions from the guide:
1. Lower tax rates. The first thing to consider is the new tax brackets and lower tax rates.
"The primary focus of Congress was the corporate tax rate," Dux says. "Instead of a multiple tax bracket that existed for corporations, there is now a flat 21% tax rate."
How the farm or ranch's income is reported depends on how the operation is organized. Those organized as sole proprietorships, partnerships or S corporations are considered pass-through entities with their business income reported and taxed on individual returns. Businesses organized as C corporations will pay taxes as a corporation, and will be subject to the flat 21% tax rate.
"Some farmers or ranchers organized as C corporations may experience a tax increase, but a vast majority of farmers or ranchers are organized as S corporations, sole proprietorships or partnerships, and are considered pass-throughs. They will receive a beneficial tax deduction," Dux says. "It's a 20% deduction before it's subject to the individual tax rates, and all of those individual tax rates have been lowered."
2. New capital investment rules. The Tax Cuts and Jobs Act (TCJA) also changes the rules surrounding capital investment, which Dux says will allow producers to reinvest more back into their operations. This includes a change to Section 179, a small-business expensing provision that allows farms and ranches to make a purchase without it being subject to income taxes. This exemption was doubled from $500,000 to $1 million.
The other component relates to Section 1031 like-kind exchanges.
"Before, when farmers made a capital purchase, if they had older used machinery that was fully depreciated, and they're buying newer machinery, they could use 1031 exchange to bring the tax liability down," Dux says. "If you bought a $100,000 tractor, and you trade in an older tractor worth $50,000, you would start at a recorded basis of $50,000."
Previously, farmers could use the Section 1031 exchange for machinery, real property (property and buildings) and livestock purchases. Under TCJA, Section 1031 doesn't apply to machinery and livestock purchases, and producers have to report those purchases differently on their income tax form. That $50,000 trade-in value of the previously mentioned tractor would be recorded as income, and the full capital purchase of $100,000 would be accounted for.
"In Nebraska, that was actually going to increase a farmer's personal property taxes, because they're starting at a higher tax basis," Dux says. "For two years we've been able to change that in the Nebraska Legislature, so the old way of handling Section 1031 exchanges stays the same in Nebraska. But we have to work on that legislation again during the 2019 session."
3. Estate tax exemption doubled. The new tax code also doubles the base estate tax exemption until 2025.
"The long-term elimination of estate taxes has been a focus of our organization for a long time. We've gotten close, but we've been able to increase the exemption before the net worth is subject to estate taxes," Dux says. "It was a $5 million-per-person exemption for a family, and a 45% tax rate for that exemption. That $5 million exemption, which turns into $10 million for a married couple, went up to $10 million, and $20 million for a married couple."
4. Individual health insurance mandate repealed. The measure repeals the individual health insurance mandate of the Affordable Care Act by removing the penalty for those who don't purchase insurance, and maintains the deduction of medical expenses for those who itemize deductions.
"There are people in agriculture that have gone without health insurance because of the cost. Some get an off-farm job specifically for insurance. Now, if a producer can't get health insurance, they no longer have to pay that penalty," Dux says. "It's also a reminder of our health insurance group plan for farmers and ranchers [Nebraska Farm Bureau's large group association health plan, or AHP]. If still considering health insurance, members have until Dec. 12 to sign up."
5. Parts from original tax code maintained. Some of the most important parts of the of updated tax code are those that were maintained from the previous code, Dux says.
This includes the ability to use cash accounting. The law also expands the number of farm corporations that can use cash accounting, which allows them to record income when they it's received and expenses when they are paid — rather than when they are incurred. This allows farmers to defer income for taxing purposes if they haven't yet received payment for grain sold at harvest.
In addition, farmers and ranchers can still fully deduct property taxes off of their federal income taxes and can still deduct business interests.
"It's not only about opportunities we gained. It's also what we were able to maintain in the tax code," Dux says. "We think this guide is a timely reminder as farmers prepare for end-of-the-year tax planning — and, hopefully, keep them informed for next year."
The guide, "5 Things to Remember: Federal Tax Code Changes for Farmers and Ranchers," is available on the Nebraska Farm Bureau website at nefb.org.